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Capital Adequacy - Capital Components; Basel Accord Tier 1/Tier 2 - ANPRM

From: Staley, Steve
Sent: Monday, April 13, 2009 2:36 PM
To: Wynn, Wade
Subject: FW: Question related to Exhibit 1 "Paid in Capital Surplus"

Hello Wade, please see below and the attachments in answer to your questions. Also, consider these as a CoBank response and not a full Capital ANPR Workgroup or ASWG response. Note that we have iterated this with PWC and USAgbank. I am of course available for questions. Best regards, Steve Staley 303-740-4088

From: Wynn, Wade
Sent: Monday, February 23, 2009 2:00 PM
To: Staley, Steve
Subject: Question related to Exhibit 1 "Paid in Capital Surplus"


The FCA needs further clarification on the capital component “Paid in Capital Surplus,” which you briefly described in the memo below. We are still unclear as to what the System is proposing and how Paid in Capital Surplus would qualify as Tier 1 capital. A step-by-step hypothetical example would be helpful using balance sheet accounts. Please walk through the transaction, explaining what would be regulatory capital and why. I have provided a few scenarios below as an example.

Pre-merger Book
Purchase Price > Fair Value
Purchase Price < Fair Value
Purchase Price = 30Purchase Price = 10
Please consider the following questions in your response.

1) How will the consideration exchanged as part of the merger be valued? Answer-At fair value.

2) What intangible assets, other than any goodwill, may be recognized by the acquirer? Answer-Please see the appendix to FAS 141R which lists numerous intangibles. 3) If there is a bargain purchase, would that dollar amount flow through to capital from gain recognition on the income statement, or be recorded directly as capital? Answer-It would flow through the income statement. 4) Would the “Paid-in-Capital Surplus” account be the rough equivalent of unallocated retained earnings or would the amount be earmarked for allocation to specific borrowers? Answer-It is our view that this would certainly be the equivalent of URE even given that some Farm Credit institutions might attribute (not allocate) the Paid-in Capital Surplus to their patrons.

Thanks in advance for your responses.

Wade Wynn

Steve Staley
Senior Vice President
303-740-4088 [ph]
303-224-2759 [fax]
5500 South Quebec Street
Greenwood Village, CO 80111

CoBank 141R-Examples-FINAL-8 (2).xlsx